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Finance & Stock Groups Forum Index » Financial Planning » short vs. long-term bonds
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| Jouup |
 Posted: Tue Jul 03, 2007 6:04 pm |
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can someone explain to me the relationship between a 20yr treasury note and short-term
intermediate bond fund?
is it always that the 20yr note is more of a risk as nobody knows what inflation will
be like in 5,10,15,20 years or what is the thinking that would make someone buy the
20yr notes? especially now that the us debt is so huge?
would is be a reasonable assumption that the short-term would pay similar to federal
funds rate or around 5% per year? would the 20yr pay a bit more?
these were the 2 things I was comparing, hopefully they illustrate what I was asking
about
http://finance.yahoo.com/q/bc?s=TLT&t=5y (shearson lehman 20yr)
http://finance.yahoo.com/q/bc?s=DSIGX&t=5y (dreyfus short-intermediate government) |
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| joetaxpayer |
| Posted: Tue Jul 03, 2007 6:04 pm |
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Jouup wrote:
Quote: can someone explain to me the relationship between a 20yr treasury note
and short-term intermediate bond fund?
No. Not really. That relationship is part of the yield curve, which
'normally' would be upward sloping, the increased yield at the longer
end accounted for by a combination of anticipated higher inflation and
uncertainty.
Quote: is it always that the 20yr note is more of a risk as nobody knows what
inflation will be like in 5,10,15,20 years or what is the thinking that
would make someone buy the 20yr notes? especially now that the us debt
is so huge?
No, that's when you get a flat or inverted yield curve. There are
multiple causes of such an event, the fed tightening short term money is
much of what is happening now. Short term high demand can push rates up
while having little impact long term. Keep in mind, ultimately it's
supply and demand. The need for cash is the same as selling bonds,
selling pushes the price down and the rate/yield, up.
Quote: would is be a reasonable assumption that the short-term would pay
similar to federal funds rate or around 5% per year? would the 20yr pay
a bit more?
Again, during normal times this would be the case. Google on 'yield
curve' and you'll likely find a number of good sources for further details.
JOE |
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| PeterL |
| Posted: Tue Jul 03, 2007 6:04 pm |
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On Jul 3, 8:51 am, "Jouup" <j.j...@glutwer.nl> wrote:
Quote: can someone explain to me the relationship between a 20yr treasury note and short-term
intermediate bond fund?
Short term or intermediate term? Which one are you talking about?
A treasury lets you lock in the rate. You hold the note to maturity,
you get the interest and the principal back. A bond fund can
fluctuate daily.
Quote:
is it always that the 20yr note is more of a risk as nobody knows what inflation will
be like in 5,10,15,20 years or what is the thinking that would make someone buy the
20yr notes? especially now that the us debt is so huge?
would is be a reasonable assumption that the short-term would pay similar to federal
funds rate or around 5% per year? would the 20yr pay a bit more?
these were the 2 things I was comparing, hopefully they illustrate what I was asking
about
http://finance.yahoo.com/q/bc?s=TLT&t=5y (shearson lehman 20yr)http://finance.yahoo.com/q/bc?s=DSIGX&t=5y(dreyfus short-intermediate government) |
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| Mark Freeland |
| Posted: Tue Jul 03, 2007 10:02 pm |
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"Jouup" <j.jouu@glutwer.nl> wrote in message
news:5ev4rcF3a1v0rU1@mid.individual.net...
Quote: can someone explain to me the relationship between a 20yr treasury note
and short-term intermediate bond fund?
You seem to be mixing up several issues here - individual bond vs. bond
fund, long term verses short term (yield curve), government vs. corporate,
I'll limit my discussion to the yield curve. Given that you are comparing
two government bond funds below (TLT and DSGIX), neither the issue of
individual bond vs. fund nor the issue of corporate vs. government seems
relevant
Quote: is it always that the 20yr note is more of a risk as nobody knows what
inflation
will be like in 5,10,15,20 years or what is the thinking that would make
someone buy the 20yr notes?
Generally speaking, the yield curve (yield vs. time to maturity) flattens
out around 10 years. While interest rates still rise as you buy longer
bonds, the rise is not worth the risk in price fluctuation.
So, when someone buys bonds with 20 year maturities (or funds that invest in
same), one typically is making a bet on interest rates - expecting interest
rates to drop (and thus the price of the bonds to rise, since the price
moves in the opposite direction to rates). If one is not trying to make
interest rate movement bets, one invests in 10 year notes.
Why 10 vs. 2 year? With a normal yield curve (rising as maturity
increases), one buys the longer term bonds for the higher interest rate.
Why would longer term bonds offer higher rates? Because people have to be
compensated for taking on interest rate risk - the risk that interest rates
would rise and they'd be stuck with a lower-paying bond.
While interest rates tend to move in the same direction as inflation, they
are not the same. If they were, then the "real rate" of bonds (i.e. the
stated or nominal rate, less the inflation rate) would remain constant. Yet
real rates vary over time.
Occassionally, long term rates are even lower than short term rates. A
common reason for this is that people think the economy is slowing, so that
they expect interest rates in the future to drop. So they want to buy
longer term bonds to lock in their yield for the long term. That pushes up
demand, increasing the price of the longer term bonds, thus pushing down the
yields on those bonds.
Quote: especially now that the us debt is so huge?
Doesn't matter. US government debt is still regarded as the safest in the
US if not the world. Meaning that it will not default. (It could create
inflation, though.)
Quote: would is be a reasonable assumption that the short-term would pay similar
to
federal funds rate or around 5% per year? would the 20yr pay a bit more?
One usually sees a rising yield curve, rising from something around the fed
funds rate for 0 year maturity (money market funds). Rising means that
short term government funds will usually have somewhat higher yields, 10
year gvmt funds higher, and 20 year gvmt funds a smidgen higher still.
But remember that this is yield, not total return. As interest rates rise,
the price of bonds drop - the longer the time to maturity, the larger the
drop, all else being equal. And as already explained, sometimes long term
bonds yield less than short term bonds.
Mark Freeland
BnetOnewsX@sbcglobal.net |
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| Elle |
| Posted: Wed Jul 04, 2007 1:08 am |
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"Jouup" <j.jouu@glutwer.nl> wrote
Quote: can someone explain to me the relationship between a 20yr
treasury note and short-term intermediate bond fund?
I prefer to substitute above, "short and intermediate term
bond funds."
DGSIX (which you mentioned) holds both short and
intermediate bonds.
Quote: is it always that the 20yr note
This kind of U.S. Treasury issue technically is called a
"bond" not a "note." A treasury note by definition, at least
according to my reading, has a maturity of about two to ten
years. A treasury bill matures in a year or less.
Quote: is more of a risk as nobody knows what inflation will be
like in 5,10,15,20 years or what is the thinking that
would make someone buy the 20yr notes?
Historical data indicate that the overwhelming majority of
the time, long term bonds, such as a 20-year Treasury, pay a
higher yield on any given day compared to shorter maturity
bonds, CDs, etc. Market principles dictate that this is due
to investors having to take more risk with such a bond. It's
not just inflation risk, though. It's the fact that, the
further out in time one goes from the present, the less
predictable the economy would seem to be.
To see this trend since 1977, study the interactive graphic
at
http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve
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Note however that the yield curve tends to flatten out for
maturities in excess of about five years. This suggests that
optimizing one's (investment grade, implied) bond
investments might be best achieved by constructing a bond or
CD ladder going out five years, in increments of say either
a year or 6 months.
Quote: would is be a reasonable assumption that the short-term
would pay similar to federal funds rate or around 5% per
year? would the 20yr pay a bit more?
Historically speaking, long term bonds have averaged a
higher yield. The question for many though is whether this
higher yield is sufficiently superior to shorter term issues
to warrant the added risk of the long term issues.
At present, and as Joetaxpayer pointed out, we are currently
in an anomalous situation with regard to bond yields, in
that the yield curve is inverted. Historically speaking,
inversions are uncommon.
What you want to take from these two graphs is the higher
volatility of the 20-year fund vs. the shorter term fund.
The first has varied from 0% to about 15% quite a bit. The
second has a range of only about 5%.
What is your aim? You'll probably have to narrow your
question more, and state your goals, to get more meaningful
responses. |
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| Jouup |
| Posted: Wed Jul 04, 2007 2:44 pm |
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Elle wrote:
Quote: http://www.smartmoney.com/onebond/index.cfm?story=yieldcurve
At present, and as Joetaxpayer pointed out, we are currently
in an anomalous situation with regard to bond yields, in
that the yield curve is inverted. Historically speaking,
inversions are uncommon.
if I read the link you provided correctly, the inverted curce is a strong predictor of
a shrinking economy or recession |
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| Elle |
| Posted: Tue Jul 10, 2007 1:18 am |
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"Jouup" <j.jouu@glutwer.nl> wrote
Historically, the correlation between an inverted yield
curve and a subsequent recession has been strong. I do not
like calling such a phenomenon a "predictor" or even just
"strong predictor." Because for one, this promotes
numerological (that is, religious, lacking in logic,
gambling-based) beliefs about stocks, bonds, markets, etc.).
For another, it promotes thinking for the short term, with
the shor-term's addictiveness. Thinking for the short term
time and again has been shown to be hazards to people's
portfolio and financial goals.
What I do like is encouraging investing based on long term
trends in economies (the U.S. and world's, etc.);
understanding the basis and caveats for these long-term
trends, etc. |
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